Investors processed the news that the Federal Reserve would engage in further debt buying and then turned their attention to the central bank’s statement of fundamental weakness in the economy. Stock index futures dropped sharply on Wednesday morning, as many feared that the markets had reached unsupportable levels.
Dow Jones Industrial Average index futures slipped 132 points to 10,486, while S&P 500 futures fell 16.2 points to 1,103.50. Futures on the Nasdaq 100 lost 28.25 points to 1,868.25 at 9:00 a.m. EST.
Markets around the world suffered the same fate, showing once again how tightly linked the globe’s financial systems have become. Futures contracts on the Bovespa dropped 744 points to 66,650, while FTSE 100 index futures lost 72.50 points to 5,286.
Part of the general disappointment comes from the fact that the Fed’s proposed quantitative easing actually keeps the balance sheet constant, rather than expanding it. It will not contract the monetary supply; rather, it will reinvest the payments it receives from its vast portfolio of mortgage-backed bonds back into U.S. Treasury notes.
The Fed’s words were revealing, too, in their pessimism. “The pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit,” said the central bank in yesterday’s statement.
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